A CPA’s Guide for Lottery Winners

Dreams! What if YOU win! With the next Powerball winning ticket expected to be worth over a billion dollars; yes, that’s right Billion with a B.

Unless you have been totally out of touch with the media, like off the grid in remote Alaska or somewhere, surely you have heard, and, more likely than not, some of you have even dreamed about what it would be like to win and suddenly have such an enormous sum of money.

Unfortunately, many lottery winners, like a large number of professional athletes or others who suddenly become rich, often squander the money within a short period of time. The existing lottery win is so big that it would almost be difficult to squander in one lifetime, but for the lucky winner(s) there are some steps to take to protect your winnings.

IMMEDIATE STEPS

First, when you purchase your ticket(s) sign the back immediately; a lottery ticket is a bearer instrument so that whoever signs the ticket and presents it with a photo ID will claim the prize. How miserable would it be to pick the winning numbers and misplace the ticket and have someone else claim “your” prize?!

Second, remain anonymous, if your state will allow it, and South Carolina does allow winners to remain anonymous. If you make an announcement, you will be bombarded with requests from every direction. You or you and your spouse should be the ones to decide what to do with the money, after consulting with the appropriate professionals.

Third, assemble a team of professional advisors before you ever advance your claim; there are alternatives about how to receive the prize money; you only receive the entire broadcasted amount if you take payments over 30 installments. You will need advice about the present value of the lump sum over the installment option, including estimating the related tax impacts. So, at a minimum, assemble a team comprised of a trusted CPA, an attorney and an investment advisor.

Fourth, use a specific amount of your choice to splurge and enjoy the dream trip of your lifetime, wherever that might be or some other extraordinary splurge of your choice; there should be some immediate joy from such a significant event. Then, try to avoid any other significant lifestyle changes for at least six months as you adjust to this new wealth. Continue working and move deliberately before making major changes.

INTERMEDIATE PLANS – within six months

Fifth, as a family group determine the desired/appropriate investment portfolio allocations. The sum of money is so large, even if it comes in installments, that the investment planning should cover multiple generations with the allocations acknowledging the age variances and the related risk tolerance. As you age, your portfolio should become more conservative, and when you are planning for younger generations you should seek more growth.

Sixth, another recommended family group decision would be to determine the charities you want to support, both now and into the future. Current gifts could be made directly or through your local Community Foundation, and then long term support for chosen charity groups could be supported by current gifts to your local Community Foundation for the immediate tax deduction against the huge income in the year of winning even though the transfers to the chosen charities from the Foundation might be made over a long period of years.

Seventh, pay off all debts; this event could be moved up the priority list and certainly should be if there is any significant level of credit card or other high interest debt. It is deferred until here because the payoffs are likely to generate another deluge of credit offers that could possibly create more aggravation than benefit during the initial transitional period.

LONGER TERM CONSIDERATIONS- within a year

Eighth, develop a budget for both recurring expenditures/expenses and acquisitions; certainly, you can now afford a lifestyle different from before and you can make acquisitions that were not feasible previously, but do not allow the new wealth to overwhelm you and cloud your judgement. Budget generously for lifestyle and acquisitions, but make sure that you maintain boundaries for spending that will allow you to retain significant wealth. Oh, and do not forget about taxes; more detail below but you will have significant income taxes to pay upon receipt of the award and then annually on the earnings generated therefrom.

Ninth, plan for taxes; after you and your team of professionals determine your choice of how to receive the award, plan currently for income taxes at the highest rates, currently 39.6 % federal and 7% South Carolina. If you elect the lump sum payment on a 1.5 Billion dollar award, the lump sum will be roughly $ 930,000,000; income taxes on the award will be roughly $435,000,000 leaving approximately $ 495,000,000. Earnings at around 3% would generate nearly $ 15,000,000 per year requiring additional income tax payments of around $7,000,000 leaving approximately $ 8,000,000 annually for living, gifting, contributing, retaining, etc. The annuity election would provide for 30 annual installment payments of $ 50,000,000 plus, but, of course, income taxes will absorb almost half of that amount leaving about $27,000,000 per year for living, giving, contributing, retaining, etc. Regardless of the election for the award, there should be a huge amount of wealth accumulation to pass on for generations. Fortunately, Estate tax exemptions are very generous currently with each individual allowed to transfer $ 5.45 million dollars with no estate tax. After that exemption, estate taxes are at a 40% flat rate. So, for example, if the award winner elects the lump sum and retains the full amount of the award – simply living on the net after taxes of, $ 8,000,000 – the $ 495,000,000 award would be reduced by the $ 5.45 million exemption or $ 10.9 million for a couple and the estate taxes for a single individual would be $ 198,000,000 leaving $ 297,000,000 for the next generation. This example gives no consideration to lifespan and the growth of the asset base, annual gifts, generation skipping transfers, or various strategies that might help reduce the tax burden. REGARDLESS, the tax burden will be huge, and the estate tax is particularly onerous, to me, since taxes were paid on the funds when received.

Tenth, but certainly not last in importance; coordinate with your team of professional advisors to take steps to protect your assets and maximize the amounts available for subsequent generations. Various asset protection strategies such as Limited Partnerships, Limited Liability Companies, Trusts, etc. can be coordinated with income and estate tax plans to both protect assets and maximize wealth transfers. Listen to your advisors, and make them explain the plans and approaches to you so that you understand both the components and the overall plan; then, YOU make the decisions that you think are best for you and your family group.

If you are the lucky winner, or one of them, when the numbers are selected in this Powerball drawing or a subsequent one, be thankful for the enormous blessing and be very careful in exercising your judgement in selecting advisors and developing plans – both short and long term for using the windfall to assure financial security for yourself and your family for a very long time.